Purchase of goods on behalf of foreign buyer can be ‘purchase of goods for export’

Jun 21, 2013

21st June, 2013

The Karnataka High Court examined the issue of income arising or accruing or deemed to arise or accrue in India when certain allied activities like quality control are undertaken while acting as liaison between manufacturers and the head office. [CIT v. Nike Inc, HC judgement dated 7-3-2013] The liaison office contended that no income is deemed to accrue or arise to a non-resident from operations confined to purchase of goods in India for the purposes of export, even if done through an agency.

The department argued some part of the business was carried on in India by identifying manufacturers, supervising manufacture, undertaking quality checks, sending goods directly to place of consumption etc. The assessee thus had a business connection in India. Further, it was not the liaison office which was engaged in export but the indigenous manufacturer and thus the benefit of exemption under Section 9(1)(b) of the Income-tax Act, 1961 was to be denied.

'Purchase of goods for export’

The Tribunal found force in the contentions of the respondent and held that the condition of ‘purchase of goods for the purpose of export’ was satisfied. It reasoned that there being no contract between the local manufacturer and itself, the respondent acted as the buyer’s agent.

Assisting local manufacturers - not business connection

The High Court held that the assessee could claim the benefit of exemption under Section 9 (1) (b) since the whole object of the transaction was to purchase goods for the purpose of export. The activity of the assessee in assisting the local manufacturers to manufacture goods meeting international standards and export the same was not ‘ business connection’. In the process, the assessee had not earned any income and if at all the foreign buyers paid any sum to the assessee outside India, it would not be taxable, having arisen outside India.